Are your clients thinking of paying employees in cryptocurrency?
By Justine Riccomini, Head of Tax (Employment and Devolved taxes)
7 July 2022
Are your clients increasingly starting to ask about paying employees in cryptocurrency and are you qualified to advise them?
Cryptocurrency, cryptocoins, cryptoassets, Bitcoin, Cardano, payment tokens, Ethereum, exchange tokens, – all words which are becoming increasingly common in everyday language, can be roughly translated as “virtual money’s worth”.
Increased appetite for cryptocurrency
Virtual money’s worth appears to carry all the hallmarks of a high-risk investment – but that isn’t stopping people from investing in it. According to the Payment Services Regulator (PSR), the market is now worth £1.6 trillion globally and over 2.3 million people now own a cryptoasset in the UK – the average investment holding being around £300.
With suggestions now doing the rounds that it may be possible to purchase cars with Bitcoin, for example, or that virtual money could eventually become legal tender, it’s easy to see how some directors and employees may develop an appetite for being paid in cryptocurrency or in benefits-in-kind (possibly using a form of virtual salary sacrifice) which have been purchased by these means.
Where do you and your clients start to navigate the maze, and how does UK payroll and taxation fit into the equation? It is important to note that employees working overseas may be treated more, or less favourably insofar as being paid by cryptocurrency is concerned.
For example, in China cryptocurrency is illegal and it is not possible to exchange it for traditional currency, whereas in Europe and the US, this is not the case.
Keeping up with the pace of change
It is probably worth reading up on exactly what ‘blockchain’ (the technology behind cryptocurrencies) is – ICAS has numerous resources to read up on - and what the PSR has to say about it all. They have recently referenced a 2019 white paper by Diem’s in the US which speaks of the use of a crypto-wallet which could be utilised to make payments using PayPal, for example.
The Financial Conduct Authority (FCA) has also conducted research that points towards the use of virtual money in transaction rapidly becoming the norm.
However, norms are often accompanied by complacency. How much trust can be placed in a currency that is not currently traceable or regulated and, with that in mind, should it be used as a means to pay and reward people?
Risky business?
The UK Government is currently working with other jurisdictions and the global banking sector considering how to regulate cryptoassets. It is important to note that the FCA does not regulate most cryptoassets and they emphasise that investments in unregulated cryptoassets are therefore unprotected. Agents and employment tax advisors generally should consider the risks for themselves and clients in this complex and relatively opaque area.
The FCA has set up a cryptoasset page to raise awareness of this and provide information to the public. They recommend that independent financial advice should be sought from a suitably qualified professional when considering such investments. Their top four considerations are:
- Volatile value
The market value of cryptoassets can be extremely volatile. You could lose a lot, and quickly. It’s also worth remembering that there are many competing blockchain companies looking for your investment and that some will inevitably fail. - Theft
Cryptocurrencies can only be bought and sold on cryptocurrency exchanges. These exchanges are a tempting target for hackers and security breaches have led to the theft of digital currency, with not all investors getting their money back. - Hard to spend
You can’t spend cryptoassets like cash as few retailers accept cryptocurrency such as Bitcoin as payment. So, generally you must sell them on an exchange, with their associated security issues. If you’re storing your cryptoassets on a password-protected personal hard drive or memory stick and you lose or forget the password, you may well have lost access to your investment altogether. - Unregulated
Cryptoassets are largely unregulated. If your investment is stolen, there isn’t an easy way to get your money back, and FSCS can’t protect you. As the industry is still developing, there are scams involving cryptoasset investments that are hard to distinguish from genuine investment opportunities.
Cryptocurrency and employment tax implications
When faced with having to answer client questions on cryptocurrency in the context of employment related remuneration planning, it is easier to break this concept down and see it for what it really is – employment earnings.
If someone is a statutory director or employed under a UK employment contract and they are a UK taxpayer then the method of payment is largely irrelevant because an income tax (PAYE) liability applies to it, whether it is ‘money’ or ‘money’s worth’. Cryptocurrency is capable of being converted into traditional money and therefore it is defined as ‘money’s worth’ by HMRC.
Back to reality, then, courtesy of s.62 ITEPA 2003. The Benefits Code within ITEPA 2003 will also apply to any benefits in kind provided by way of cryptocurrency. HMRC’s Cryptoassets manual replaced the two original manuals, 'Cryptoassets: tax for individuals' and 'Cryptoassets: tax for business' on 30 March 2021. The new manual was last updated on 22 February 2022.
HMRC internal manuals at CRYPTO42050 discusses making payments to employees and where pension contributions are made with cryptocurrency, this guidance can be found at CRYPTO43000.
NICs
The NICs legislation at s.3 SSCBA 1992 mirrors the tax legislation – so what is deemed to be employment earnings for tax purposes is also employed earner’s earnings for NICs purposes. HMRC internal manuals at CRYPTO42200 discusses the National Insurance treatment. Benefits in kind provided by way of cryptocurrency should be declared on P11D and attract Class 1A NICs, just like any other benefit in kind.
A note on National Minimum Wage
ICAS wrote to BEIS in July 2022 to ask them to confirm how cryptocurrency is classified for NMW purposes and requested that suitable wording be placed in the NMW guidance manual (published by HMRC but governed/legislated by BEIS) to cover this off. BEIS has responded to say that “Cryptoassets, like other BiKs, are not considered to form part of a workers’ remuneration for NMW purposes under regulation 10 of The National Minimum Wage Regulations 2015. As such, cryptocurrency is not something we currently have plans to produce NMW guidance on.” In the interests of risk mitigation, it is probably prudent to ensure that an employee or worker who is eligible to receive NMW is paid at least that part of their salary in cash or ‘fiat money’ (inconvertible paper money made legal tender by a government decree) to ensure that an NMW breach cannot be deemed to have occurred.
Further guidance is also provided in the HMRC manuals on the tax treatment of benefits provided by third parties and payments which are not readily convertible assets.
Many tax experts who are now regularly involved in the cryptoasset advisory space are in disagreement with HMRC about their classification of Cryptoassets as “money’s worth” – however, until regulation followed by legislative provisions and tax cases collectively come into play down the line, the Cryptoasset Manual is what we have to work with, and HMRC’s position is clear.
